Ofcom — which has the power to open a formal investigation into any telecoms provider deemed to be failing to meet acceptable service levels — said that it was keeping a close eye on the business.

Although no inquiry has been opened, City sources said that the company — which recently lost the contract business of Vodafone, a key client — was being scrutinised daily and receiving regular calls from Ofcom about customer issues ranging from call centre problems to technical glitches. The problems with TalkTalk, which are posing a serious risk to the reputation of a group that has prided itself on its good service, came amid growing concerns from investors about the future of the group’s core high street mobile phone distribution business.

Charles Dunstone, the chief executive, who announced half-year results yesterday showing a 62 per cent slide in pre-tax profits to £14.1 million, pushed hard to allay those concerns. However, investors were not won over and sent the shares tumbling a further 11p to 283½p.

A total of £685 million has been wiped off Carphone’s market value since the Vodafone announcement and the threatened departure of Orange, another key retail distribution partner.

One analyst, who declined to be named, said: “This share fall is about whether the relationship with Vodafone is repairable and, if it not, is the business still viable?”

The sharp fall in profits announced yesterday, the group said, was in large part the result of the costs of setting up the TalkTalk broadband business, recruiting call centre staff and marketing the service.

Carphone, the UK’s third- largest broadband provider, with two million customers, had already admitted to investors that widening costs would increase its losses on the broadband service this financial year by £20 million to £70 million.

Although Mr Dunstone has acknowledged customer problems, he said that they were fast coming under control. He has sought to position himself as a victim of his own success in signing up 525,000 customers for the service in only five months. But critics believe that he has paid the price for plunging headlong, with his “free” offer, into a technically complex market.

Under the EU Telecoms Framework, all telecoms and internet service providers must adhere to detailed general conditions that lay out acceptable levels of quality and service. Last year the consumer broadband service of Cable & Wireless was subject to a pre-investigation inquiry by Ofcom after complaints. Ofcom will launch an investigation only when a group fails to meet certain detailed criteria.

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